Words from the wise for the week that was (Oct 1 to 7, 2007)
” … the mega third phase of this bull market lies ahead. It may take into next year, but it’s a’comin’,” said an upbeat Richard Russell from an otherwise somber La Jolla in the aftermath of the landslide.
Before highlighting this and some other memorable quotes from market wizards during the past week, let’s briefly review the market’s action on the basis of a few performance charts.
Indications of easier conditions in credit markets calmed investors during the past week and resulted in the start of the fourth quarter seeing a number of stock markets recording record highs.
On the economic front the feature of the week was the release of as-expected jobs data in the US on Friday, indicating that the US economy was recovering from the recession fears that spooked financial markets since the whole credit debacle started in July.
US equities performed strongly, with some of the previous laggards such as the Russell 2000 Index (small caps) and REIT stocks (not shown on graph) advancing by 4.9% and 6.2% respectively. Whereas the Dow Jones Industrial Index (including a number of companies benefiting from the US dollar’s slide) has been leading the boards for a while, the past week was the S&P 500 Index’s turn to hit an all-time high.
Elsewhere in the world mature and emerging stock markets in all geographic reasons powered along and recorded new highs in many instances. The Chinese markets were closed for the mid-Autumn festival holiday last week.
Global bond yields were higher across the yield curve as investors re-assessed the fallout of the credit squeeze not having such dire consequences for economic growth as previously expected. The rate of the US 3-month Treasury Bill also moved higher as the realization dawned that a further reduction of the Fed funds rate at the FOMC’s meeting of October 30 and 31 was perhaps no longer on the cards.
The expectation of US interest rates remaining at current levels for longer helped the US dollar stage a recovery from a short-term oversold situation. However, talk of diversification out of US dollar assets by an ever-increasing list of central banks (the latest being Vietnam and Qatar) stemmed the rise.
With the exception of industrial metals (including a strong performance by copper), commodities retreated across the board during the past week. This is seen as a necessary breather for markets that have been surging at break-neck speed.
The debate is still on whether the credit crisis is over or not. The words from the investment wise below will hopefully assist to make sense of this and other pertinent investment issues.
Economy.com: Survey of business confidence for world
Source: Moody’s Economy.com, October 1, 2007.
Paul Kasriel and Asha Bangalore (Northern Trust): Rates likely on hold at October FOMC meeting
Source: Paul Kasriel and Asha Bangalore, Northern Trust’s Daily Global Commentary, October 5, 2007.
MarketWatch: Fed’s Kohn says half-point rate cut may be enough
Source: Greg Robb, MarketWatch, October 5, 2007.
Paul Kasriel and Asha Bangalore (Northern Trust): ECB and Bank of England policies
Source: Paul Kasriel and Asha Bangalore, Northern Trust’s Week in Review, October 5, 2007.
David Fuller (Fullermoney): Outlook for GDP growth and interest rates
“While the US and Europe should avoid recessions, assuming the balance of monetary policy remains in favor of easing, slower economic growth almost certainly means lower corporate profits for many industries. This will be a headwind for Western stock markets. Consequently, a repeat of the gains for stock indices in the West, to which investors have become accustomed in recent years, will require valuation expansion in the form of higher P/Es. This is not guaranteed, although easier monetary policy will help. Companies which export to Asia should be among the better relative performers. Meanwhile, the stagflation risk is increasing.”
Source: David Fuller, Fullermoney, October 1, 2007.
Richard Russell (Dow Theory Letters): Grip of the debt monster
“Fed Chief Ben Bernanke is an expert on the Great Depression. He wrote his dissertation on the Great Depression. There is no way in the world that Bernanke would be willingly allow the US to sink into a deflationary depression. The choice, as I’ve warned about for the last number of years is – ‘inflate or die’. Clearly, Bernanke has already made his choice. The choice is to inflate.”
Source: Richard Russell, Dow Theory Letters, October 3, 2007.
Paul Kasriel and Asha Bangalore (Northern Trust): Inflationary impact of Fed’s action
Richard Russell (Dow Theory Letters): Mega third phase of bull market lies ahead
“Note that the Dow is pushing subtly higher and higher. Where’s it going? It’s going ever closer to the ‘big show’, that’s where it’s going. Yes, the Big One, the mega third phase of this bull market lies ahead. It may take into next year, but it’s a’comin’. And you heard it here first.”
Source: Richard Russell, Dow Theory Letters, October 5, 2007.
John Hussman (Hussman Funds): Stocks – overvalued, overbought, overbullish
” … we’ve now reestablished the overvalued, overbought, overbullish combination of conditions that has historically been associated with average returns below Treasury bill yields, even when market action has been otherwise favorable on the basis of price trends. Importantly, these instances are not usually associated with immediate and persistent losses. Rather, they tend to be associated with further incremental gains and marginal new highs, followed by sudden losses that abruptly erase weeks or months of upside progress within a handful of trading sessions.”
Source: Dr John Hussman, Hussmann Funds, October 1, 2007.
BCA Research: Anti-US housing trades
” … emerging market equities have completely recovered, hitting a new high. Meanwhile, the dollar continues its steady downtrend, reflecting waning interest in US paper as a consequence of relatively unattractive economic and investment prospects. In sum, the environment is the opposite of the 1990s, when the dollar and US equities were king.”
Telegraph: Dollar’s double blow from Vietnam and Qatar
“Separately, the gas-rich Gulf state of Qatar announced that it had cut the dollar holdings of its $50bn sovereign wealth fund from 99% to 40%, switching into investments in China, Japan, and emerging Asia. The drastic shift by the Qatar Investment Authority is a warning that petro-dollar powers with some $3 500bn under management may pull the plug on the heavily endebted US economy – which needs to suck in the majority of the world’s savings just to stay afloat.
“Saudi Arabia set off jitters in the currency markets last month when it decided not to cut interest rates in lockstep with the US Federal Reserve, raising doubts about its commitment to the Saudi dollar peg. But it too has strong political reasons to stick with America. Kuwait has already abandoned its peg, fearing that its economy would overheat if it continued to import America’s loose monetary policies. Separately, Iran said it would soon refuse to accept dollars for its oil exports, preferring to be paid in a ‘more credible currency’.”
Source: Ambrose Evans-Pritchard, Telegraph.co.uk, October 4, 2007.
The Wall Street Journal Online: Historic surge in grain prices roils markets
“This year the prices of Illinois corn and soybeans are up 40 percent and 75 percent, respectively, from a year ago. Kansas wheat is up 70 percent or more. And a growing number of economists and agribusiness executives think the run-ups could last as long as a decade, raising the cost of all kinds of food.
” … powerful new sources of demand are emerging. In addition to US government incentives that encourage businesses to turn corn and soybeans into motor fuel, the growing economies of Asia and Latin America are enabling hundreds of millions of people to spend more on food. A growing middle class in these regions is eating more meat and milk, which in turn is increasing demand for grain to feed livestock.
“The reversal of a long-term trend toward lower grain prices could have profound effects on the world’s ability to feed its poor. Global grain stockpiles are being drawn down to their tightest levels in three decades, leaving the world vulnerable to shocks brought on by bad harvests.”
Source: Scott Kilman, The Wall Street Journal Online, October 5, 2007.
Eoin Treacy (Fullermoney): Chinese stocks – further room for upside
Source: Eoin Treacy, Fullermoney, October 5, 2007.
Bill Gross (Pimco): “One size fits all” interest rates not appropriate
Source: Bill Gross, Pimco’s Investment Outlook, October 2007.
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